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2019 (9) TMI 810
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....are identical. On such concession, the representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 3. Facts, as culled out from the records, show that the appellantcompany, incorporated under the laws of Singapore, is a wholly owned subsidiary of Hitachi High-Technologies Corporation (HHT), a company incorporated under the laws of Japan. The appellant is engaged in trading operations across ASEAN countries and also carries out sourcing and trading operations in respect of various products and equipments. In the year August 1988, the assessee established a Liaison Office ('LO') in India [earlier known as Nissei Sangyo (Singapore) Pte Ltd] for rendering preparatory and auxiliary services, including market research and liaison activities. Branches of the LO were set up in Delhi, Bangalore and Mumbai; however, the branches of LO at Bangalore and Mumbai were subsequently closed. In July 2007, Hitachi Singapore established a Branch ....
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.... Interest under section 234A and 234B of the Act 2002-03 14,65,468 5,97,911 6,41,259 2003-04 37,24,345 15,64,225 14,42,997 2004-05 1,42,42,854 58,39,570 46,13,260 2005-06 1,61,83,140 67,67,789 45,34,419 2006-07 1,60,21,945 67,00,377 36,85,208 2007-08 2,05,53,037 85,95,280 47,27,404 Total 7,21,90,789 3,00,65,152 1,96,44,547 Total tax and interest demand 49,709,699 9. The assessee carried the matter before the ITAT, and the Tribunal vide order dated 07.06.2013, in ITA Nos. 12 to 17/DEL/2011 set aside the order passed by the assessing officer/ DRP and restored the matter to the DRP with directions to pass speaking order. The relevant findings of the Tribunal read as under: "On due consideration of the facts and circumstances, we find that the impugned order of the learned DRP is running into six pages, out of that the Learned DRP has reproduced the grounds of objections raised by the assessee and thereafter in paragraph 4 in 10-15 lines, ....
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....ined, the relevant law was correctly applied and the decision was just." (p. 1304) 9. In Woolcombers of India Ltd. v. Woolcombers Workers' Union AIR 1973 SC 2758, Hon'ble the Supreme Court quashed the award passed by the Industrial Tribunal on the ground that it was not supported by reasons and observed : ", . .The giving of reasons in support of their conclusions by judicial and quasi-judicial authorities when exercising initial jurisdiction is essential for various reasons. First, it is calculated to prevent unconscious, unfairness or arbitrariness in reaching the conclusions. The very search for reasons will put the authority on the alert and minimise the chances of unconscious infiltration of personal bias or unfairness in the conclusion. The authority will adduce reasons which will be regarded as fair and legitimate by a reasonable man and will discard irrelevant or extraneous considerations. Second, it is a well-known principle that justice should not only be done but should also appear to be done. Unreasoned conclusions may be just but they may not appear to be just to those who read them. Reasoned conclusions, on the other hand, will have also the ....
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.... to the citizen, there would be insidious, encouragement to arbitrariness and caprice. If this requirement is insisted upon, then, they will be subject to judicial scrutiny and correction." 11. In view of the above discussion, we are of the view that the order of the Learned DRP is not sustainable. It is set aside on remitted back to the Learned DRP for readjudication. All the appeals of the assessee are allowed for statistical purposes." 10. In the re-adjudication proceedings, the DRP framed its order on 27.03.2015 pursuant to the directions of the Tribunal but final assessment order was passed by the Assessing Officer on 30.03.2015 framed u/s 143(3) r.w.s 144C(13)/254 of the Act. 11. The appellant is before us against this order. 12. The ld. counsel for the assessee argued vehemently and bifurcated his submissions into four parts, which needs to be adjudicated by us and for the sake of convenience, the same are categorised as under: i) While readjudicating on the directions of the ITAT, the DRP has exceeded the directions. ii) In framing the final assessment order, the Assessing Officer has put the assessee in a more worse position than it was ....
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....ority cannot grant any authority/ power to the assessing officer that does not vest in the appellate authority itself. The ld. AR further pointed out that disallowance in the set-aside proceedings before the DRP cannot exceed the amount of original disallowance, as the same would tantamount to taking back the relief granted by the assessing officer. 18. The ld. counsel for the assessee vehemently stated that the DRP, during re-adjudication proceedings, does not have any power of enhancement and, therefore, as a consequence of the order of the DRP in re-adjudication proceedings, income of the assessee cannot exceed the income assessed by the Assessing Officer. Thereafter, the ld. AR placed reliance on various judicial decisions stating that the Tribunal does not have any power of enhancement and, therefore, cannot direct the assessing authority to make fresh assessment, which resulted into enhancement of income as compared to that which was assessed at the first stage. 19. Per contra, the ld. DR strongly objected to the submissions made by the ld. counsel for the assessee and vehemently stated it was merely incidental that after following the directions of the Tribunal, the DR....
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....gs to assist the Assessing Officer in determining the issues raised before the Tribunal in the first round of litigation. We find that in doing so, the DRP has not done any enhancement. 24. Further, we find that the provisions of section 251(2) of the Act are different from the provisions of section 144C(8) & (11) of the Act. The ld. CIT(A) is an appellate authority, whereas the DRP is a continuation of the assessment proceedings where the DRP acts as a corrective mechanism to guide the Assessing Officer for making error free assessments. The role of a DRP, in our humble understanding, is to assist the Assessing Officer in determining the correct income so that correct tax may be levied. II IN FRAMING THE FINAL ASSESSMENT ORDER, THE ASSESSING OFFICER HAS PUT THE ASSESSEE IN A MORE WORSE POSITION THAN IT WAS BEFORE FILING APPEAL. 25. Having said all that, the pertinent question which needs to be addressed is as to whether the appellant can be put to worse off positions as a result of filing the appeal before the Tribunal. As mentioned elsewhere, in the first round of litigation, the amount of profit attributable to the appellant for assessment years 2002-03 to 2007-08....
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....or cross- objections by the Department was really unnecessary. Having regard to the entire scheme of s. 39, therefore, it is clear that on a true and proper construction of sub-s. (4) (a) (i) of s. 39 the Tribunal has no jurisdiction or power to enhance the assessment in the absence of an appeal or cross- objections by the Department." 28. A similar view was taken by the Hon'ble Allahabad High Court in the case of Pahulal Ved Prakash 186 ITR 589 wherein the Hon'ble High Court observed as under: "13. It is pertinent to point out that, before the Incometax Appellate Tribunal, the assessee alone was in appeal. The Revenue had not filed any appeal or cross-objection. It is settled that the Income-tax Appellate Tribunal, while dealing with the appeal, in the absence of any cross-appeal or objection, cannot give a finding adverse to the appellant which would make his position worse than it was under the orders appealed against. It is true that the question suggested by the Commissioner is, no doubt, one of law, but the answer to it is, in our opinion, self-evident because the Tribunal has no power of enhancement. See Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 (SC)....
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....sessment years under consideration, the income would have been Rs. 7.21 crores only. However, after filing appeal and after readjudication, the total assessed income of all the years under consideration is Rs. 123.16 crores. In all fairness, the entire proceedings should now be restricted to adjudication upon the assessed income of all the years under consideration to the extent of Rs. 7.21 crores. III WHETHER THE APPELLANT HAD BUSINESS CONNECTION/PE IN INDIA 33. The business segments of appellant during the year were as follows: * Sale of Equipment to Moser Baer India * Sale of Equipment Parts, Spares & Consumables to MBI * Sale of Equipment through Independent Agents 34. We are concerned with only 1 and 2 above. 35. Facts on record show that during the relevant previous years, the assessee was having an office in India which it called Liaison Office [LO]. There is no dispute that this LO was set up in 1988 vide letter dated 24.08.1988. The Reserve Bank of India [RBI] granted permission u/s 29(1)(a) of the Foreign Exchange Regulation Act, 1973 [FERA] for posting a representative in India. This letter shows that permission has been....
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....ables is directly communicated by MBI to the Appellant. It is the say of the ld. AR that the appellant, through its Singapore office, maintains regular contacts with its suppliers spread across the world. It was further stated that upon receiving an enquiry from MBI, appellant provides the listed price of relevant parts, spares and consumables, either directly or through the LO and the LO, forwards the price quotation to MBI. The ld. AR continued by stating that thereafter, a Purchase Order was placed on appellant. A copy of PO was delivered to LO for acceptance. Later on, a letter of credit was issued by MBI to appellant without the involvement of LO. Thereafter, the merchandise is shipped to India. For sale, a commercial invoice is issued by Appellant to MBI. The shipment documents are delivered directly to MBI. As per the Agreement, payment for the equipments is made in foreign currency. 41. The ld. AR further contended that in terms of Article 5(1) of the Indo Singapore Double Taxation Avoidance Agreement (DTAA), the term "permanent establishment" means a fixed place of business through which the business of the (non-resident) enterprise is wholly or partly carried on. It is....
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....ded at the time of survey proceedings do not have any evidentiary value in the light of the decision of Hon'ble Madras High Court in the case of CIT vs. S. Khader Khan Son: 300 ITR 157, which was affirmed by the Hon'ble Supreme Court in 210 Taxmann 248. 46. The ld. counsel for the assessee proceeded by stating that the Revenue has picked up answers to selective questions to justify the allegation that the LO was PE of the appellant. 47. The ld. DR, on the other hand, stated that the Assessing Officer has relied on the material found during the survey operation to hold that the assessee had PE in India that was engaged in business activity. It is the say of the ld. DR that the DRP ha mostly relied upon the submissions made by the assessee during the assessment and DRP proceedings to affirm the findings of the AO. It is the say of the ld. DR that at least six employees were working in LO, two of which were key personnel and one was an important executive since all the exchange of emails have been copied to this important executive Leena Cardoza. The ld. DR pointed out that these employees in India office [LO] were engaged in advertisement and marketing, sales promotion, mar....
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....n the assessments of A.Ys 2002-03 to 2007-08. 51. The business segments of the appellant during the year have already been mentioned elsewhere. We find that the Revenue has heavily relied upon the email exchanges and statements of key personnel namely, Mr. Morimasa Gempei, Dy. Managing Director, Shri Jai Prabhakaran, Sales Executive and Ms. Leena Cardoza looking after sales to Moser Baer. The Revenue has also drawn heavy support from the emails of the Tax Consultant Shri Piyush Kaushik, who, in his emails has shown apprehension of the position that the Revenue might take post survey operations. The contents of the emails of Shri Piyush Kaushik clearly show that he was acting as Tax Consultant and advising the appellant on the probable tax litigation which may arise after survey operations. 52. Before adhering to these issues, it would be pertinent to consider the reasons recorded before reopening of assessment as well as the analysis of survey material and statements which read as under: "4. The reasons recorded before reopening of assessment as well as the analysis of survey material and statements is as under: "A survey u/s 133A of the I, T. Act, 1961 (Act....
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....Disk Manufacturing System and Semi-conductor Manufacturing Products includes; recommendations for maintenance and repairs, operational and maintenance training, spare parts, service contracts, maintenance and overhaul services as well as operational support services, relocation services including logistics and assembly, shut down support services, overhaul and upgrading. The global network of the company offers not only assistance to customers' needs but also commitment to provide advanced customer support. The global network of experts consists of Japan Team and Local Team, who have the technical knowledge and professional experience. 2. During the course of survey, statements of Mr. Morimasa Gempei, Deputy Managing Director of the Company, Mr. Jai Prabhakaran (working since 2005), Sales Executive and Leena Cardoza (working since 1995), looking after the sales to Moser Baer, were recorded. During survey various documents were verified Including the e- mails of the employees and copy of the documents were obtained and inventoried as Annexure A' to T, the copy of these statements as well all the documents were provided to the company before closing the survey. ....
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.... are the copy of emails taken from your laptop. Please confirm the same? A. Yes -1 agree the same are taken from my laptop. A 23 I am showing you page 23, and particularly the mail from Mr. Piyitsh Kaushik to Mr. David Wong, which has reference to information by Ms. Leena. Who are Mr. Piyush 25. l am showing page 58 to 62 of Annexure "A ", please state what are these documents? A. Page 58 is the copy of Debit Note of Service Fee for market research sent to our Japan office and the market report is being sent by Mr. Gempei to Japan office directly. Page 59 to Page 62 is the basis of Indent Commission, which we received monthly from our Singapore office, based on this we issue the Debit Note to our Singapore office. . Q.26 What is this market research, and since when these services are being provided and who provides the same now and where being provided earlier? A. I feel market research is basically giving the Indian market survey report to our Japan office. This is being provided by Mr. Gempei now. Earlier, Mr. Siddiqui was giving the market report. Q.27 lam showing you Annexure "13" containing 58 pages, which are the ....
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....siness There is no significant change in the business activities of the Indian office after the conversion of the same to a branch office. Activities continue to be the same, except earlier there was no expat and now we have an expat. The office is providing raw material Q. 13 Regarding the sales made, please state whether the involvement of Delhi office was more prior to May 2007 or is it more after 2007? s' Ans. Involvement of Delhi office was more prior to May 2007". 56. At this juncture, we have to state that the decisions relied upon by the ld. counsel for the assessee questioning the admissibility of statements recorded at the time of survey proceedings are misplaced. In the case of S. Kader Khan[supra], the Hon'ble High Court held that solely on the basis of statements given by one of the partners of the assessee firm, disclosed income was not assessable as lawful income of the assessee. In that case, statement was given by a partner who was new to the management and was incapable of answering the enquiries made. 57. In that case, the Hon'ble High Court also followed the Circular of the CBDT for arriving at the conclusion that materials co....
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....ion between the business of the appellant and the activities in India, as business of the appellant was trading and activities of the LO are core activities for a trading business. 61. It is imperative to look into the relevant parts of Article 5 of the India Singapore DTAA which read as under: India-Singapore DTAA ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially : (c) an office 7. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include : (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise." 62. In the light of the above, all that has to be considered is as to whether the activities were preparatory or auxiliary in nature to fall under the Exclusionary....
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....iary character has to be read as business solely used for the purpose of advertising, for the supply of information, for scientific research or for similar activities. 67. In contrast, formulation in India-USA/Canada DTAA "Other activities" have been mentioned which have to be read as 'Besides advertisement, supply of information and scientific research. This clearly shows that India-Singapore DTAA is restrictive in nature than the exclusionary article of India-USA/Canada DTAA. This means that as per India Singapore DTAA, unless fixed place of business [LO in the case of the appellant] was being used only for the purpose of advertisement, for supply of information, for scientific research or for similar activities which have preparatory or auxiliary character, it could not have been excluded from the definition of PE. 68. The nature of the activities of the LO, if read with the relevant answers to the questions given in the statements recorded at the time of survey, admittedly, the employees were engaged into marketing, sales promotion and market research activities which are sine qua non for a trading business, i.e. the appellant's business. The LO was actively involved in a....
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....cle 5 of India-Singapore DTAA. Firstly, in that case, the issue primarily was whether an Indian subsidiary can constitute a PE for a foreign company which did not have any office or factory or workshop in India. The High Court held that merely because a foreign company has a subsidiary in India it does not constitute its PE. Same is not the case here. In the present case of HTS, its very own office in India is being sought to be held as its PE for the reason that it performed business activities which went way beyond what could be described as 'preparatory or auxiliary' character under Article 5 of India-Singapore DTAA. v. Specific reliance has been placed on para 19 & 20 of the judgment, which emphasizes on the three requirements of Article 5 for holding a fixed place as PE, namely; (/) the existence of place of business at the disposal of the enterprise; (ii) the place of business must be of a 'fixed nature' (geographical and temporal permanence); and (iii) the enterprise being carried on is required to be 'carried on through the place of business' (with a special emphasis on word 'through'). vi. All of these three requirements ar....
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....a clause in agreement could not lead to inference that it had a Service PE in India in terms of article 5(2)(1). Also, since Adobe India was assessed on its income determined at ALP and, therefore, there was no occasion for Assessing Officer to assume that Adobe India constituted a PE for the USA company under article 5(5) of India-USA tax treaty. iv. Once again, the facts of the cited case are completely different from the case in hand. Of the specific relevance are para 32 and 33 of the judgment, where the Hon'ble HC after quoting the E-Funds case law (supra), emphasized on the required attributes of a fixed place PE, especially the requirement that the fixed place must be at the disposal of the assessee for it to carry on its business (wholly or partly) through it. Since these points have been already addressed above, in relation to the E-Funds case, using facts of the assessee's case, these are not repeated here. v. This case also does not give any support to the present case. UAE National Petroleum Construction Company [2016] 66 taxmann.com 16 (Delhi) i. It was a case of a UAE incorporated non-resident company which had entered into contra....
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....g provisions of this Article, the term "permanent establishment" shall be deemed not to include: (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity oj a preparatory or auxiliary cnaracter. In contrast, the language of corresponding Article 5(7)(k) in India- Singapore DTAA is: 7. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. It is easy to see the differing requirement of the Treaty law in respect of the exclusions that can be permitted while holding a fixed place of business as PE on the grounds of preparatory or auxiliary activities. v) Not only that the case of National Petroleum Construction Company was decided on the different treaty law, it also differed on facts. In that case the High Court noted that the Project Office of the assessee was man....
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.... DTAA states that "For the purpose of paragraph 1, the term "directly or indirectly table to the permanent establishment" includes profits arising from transactions in which the permanent establishment has been involved and such profits shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions, even if those transactions are made or placed directly with the overseas head office of the 'enterprise rather than with the permanent establishments". 75. In our considered view, even if the orders were placed directly with the Head Office of the assessee, any profit arising from such transactions can be taxed in India to the extent any part is played by the PE of the assessee in India. 76. Article 7(2) of the India Singapore DTAA requires that the PE of non resident enterprise be treated as a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 77. Thus, the PE, though a distinct and a separate enterprise, is to be trea....
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.... assessee stated that on a rough and ready basis, since the alleged PE is involved in lesser number of activities, only 10% of global profit percentage, as applied to India sales could at best be attributed as profit attributable to the alleged PE. 83. The ld. counsel for the assessee further furnished a comparative chart of Global Profit on India turnover qua profit attributed to LO by Assessing Officer/DRP which is as under: Comparison of global profit on Indian turnover qua profit attributed to LO by AO/ DRP Assessment years 2002-03 to 2007-08 Assessment year Indian turnover (MBIL turnover) Commission @ 16.5% of Indian turnover taken by DRP Expenses of LO Profit attributable to LO as per AO/DRP Global net profit rate (%) Profit taking global net profit margin on Indian turnover (100% attribution) (A) (B) = A* 16.5% (C) D= (B-C) (E) F = (A*E) 2002-03 141,131,193 23,286,647 8,864,522 14,422,125 0.72 1,016,145 2003-04 262,639,470 43,335,513 8,574,092 34,761,421 1.42 3,729,480 2004-05 2,922,938,885 482,28....
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.... own engineers * Test runs (post installation) * Training of customers' staff * After sale services, viz., maintaining the machines quality, regular maintenance and support to customers. 88. It is also not in dispute that ForeVision is also doing business with other companies. It is equally true that the DRP/Assessing Officer has not done any FAR analysis of ForeVision qua the appellant's PE [LO]. 89. We find force in the contention of the ld. counsel for the assessee that the LO is performing routine and limited functions and is operating in a risk immune environment and considering the intensity of functions, attribution made by the Revenue which ranges from 163% to 2357% is not only excessive but absurd and abnormal. 90. In our considered opinion, when a PE is treated as if it is an independent enterprise, its profits should be determined on the basis as if it is an independent enterprise. Meaning thereby, the profits of the PE should be determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own. For this proposition, we draw support from the decision of the Hon'ble Supreme ....
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....ing taxed, and income of the assessee has been brought to tax only after issue of notices u/s 148 of the Act, the plea of income having been subject to TDS is not available to the assessee and hence interest u/s 234B of the Act has been rightly levied by the DRP/Assessing Officer. 96. We have given thoughtful consideration to the rival contentions and have carefully perused the relevant material on record. As per the provisions of section 234B of the Act, an assessee who is liable to pay advance tax under section 208 will be liable to interest under section 234B of the Act, if he fails to pay such tax, or the advance tax paid by him falls short of 90 percent of the assessed tax. In our understanding of the law, an assessee must first be liable to pay advance tax under the provisions of section 208 of the Act. As per the provisions of section 208 read with section 209(1)(d) of the Act, advance tax payable has to be computed after reducing from the estimated tax liability the amount of tax deductible/ collectible at source on income which is included in computing the estimated tax liability. 97. Under section 195 of the Act, tax is deductible at source from payments made to non....